A Study of Impact of Household Savings & Investment

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Behaviour on the Economic Development of Uttarakhand

Thesis

submitted to

te

Kumaun University-Nainital

Es

in fulfillment of the requirement of the degree of

Doctor of Philosophy
in

Commerce

Supervisor:

submitted by:

Dr. P. K. Pathak
Principal & Associate Professor
Government Degree College, Baluwakote
Kumaun University

Chitranka Dalakoti

March
2010

Declaration

I declare that this thesis is the record of bonafide research work carried out by me under

Uttarakhand.

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the supervision of Dr. P. K. Pathak, Associate Professor, Kumaun University, Nainital-

I further declare that this thesis has not previously formed the basis for award of any

Nainital

Es

Date

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degree, diploma, associateship, fellowship or other similar title of recognition.

ii

Chitranka Dalakoti

Dr. P. K. Pathak

Principal & Associate Professor

Govt. Degree College- Baluwakote, Pithoragarh
Kumaun University-Nainital
Uttarakhand

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Certificate
This is to certify that Ms. Chitranka Dalakoti has carried out this research work under my
supervision for the award of Ph. D. degree in Commerce.

The thesis entitled A Study of Impact of Household Savings and Investment Behaviour

te

on the Economic Development of Uttarakhand submitted by her embodies the original

work of the candidate herself.

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She has put in the required attendance as prescribed in the university ordinance.

Dr. P.K. Pathak

Research Supervisor

iii

Acknowledgements
First and foremost I would like to thank God. You gave me the power to believe in my
abilities in the process of putting this work together. I could never have done this without
the faith I have in you, the Almighty.
I would like to express my deepest thanks to my research supervisor, Dr. P.K. Pathak, for
his constant guidance and support in carrying out this academic work. Dr. Pathak was

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genuinely interested in helping me conduct research and gave me practical guidance. His
generous and gracious support was an inspiration. The knowledge that I could approach
him whenever I was in need was a great comfort, and it helped me progress smoothly
during my PhD tenure.

I am also grateful to Dr. N.S. Bisht, Professor, DSB Campus Nainital, for providing

te

valuable insights and guidance in the process of framing my research proposal. In

addition, I would like to thank Prof. S. K Jain, I.I.T. Delhi for giving me an opportunity
to work under him in a research project which helped me a lot in understanding the
intricacies of conducting a survey. I am also grateful to my dear friends and relatives

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who encouraged me and helped a lot during the survey. I am also thankful to the
respondents of this study, who spared their time and took interest in filling up the
questionnaire.

I am indebted to my family, my father Late Dr. N.D. Dalakoti for his blessings and for
making me learn to dream,

my mother Mrs. Geeta Dalakoti, my brother Manikya

Dalakoti, my sister Mrs. Priyanka Joshi and my brother-in-law Mr. Manoj Joshi for their
unconditional love and support no matter what I do and wherever I am. I wish to record
my gratitude to my parents-in-law, Mrs. Elizabeth Thomas and Dr. K.V. Thomas for their

prayers and encouragement to complete this study. Last but not the least, I am grateful to
my husband, Mr. V.J Thomas, for ensuring availability of all the required resources, most
of all for his constructive comments, for patiently listening to my complaints and
frustrations, and for believing in me.
(Chitranka Dalakoti)
iv

Preface
Household saving contributes significantly to Indian gross domestic saving and is
growing hand in hand with the economy every year. Household savings are a major
source of capital formation, and thus play a significant role in the economic development
of India. A large number of studies have been undertaken regarding saving and
investment of Indian households, both at macro level by government agencies and at

this context.

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micro level by individual researchers, yet very few have taken a behavioural approach in

Uttarakhand, a small newly formed hilly state in northern India, modest in terms
of economic conditions and based mainly on agriculture, tourism and government sector
enterprises, is now seeing the age of economic and social transition. After being carved

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out from Uttar Pradesh in the year 2000 the state is experiencing noticeable changes, both
in economy and society. As far as savings are concern, there has always been a strong
saving culture among the households in form of physical and bank/post office savings. In
the present thesis, an attempt is made to study the changes in financial savings of the

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households over the time and the behaviour of savings in the state.
In India public policy and research efforts have attempted to increase personal

saving rates. While previous studies contributed to identifying characteristics of savers

thereby describing how and why do people save and where do they invest, the perception,
opinion, readiness and attitude of individuals/households towards different saving and
investment options have not been addressed as extensively.

To provide a better understanding of households/individual saving and investment

behaviour in Uttarakhand, hypotheses are developed to make predictions related to the
connection between saving behaviour, pattern and individual demographic characteristics
related to saving.

The study has been done at two levels. The state of saving in the state has been
explained by using secondary data from official web sites. This has helped in

understanding the changing trend of savings and investment in the state, especially with
regard to financial saving-investment and credit by households.

At the second level, primary data has been collected to examine saving pattern of
households

and

individuals

attitudes

toward

saving

instruments.

Individual

characteristics have been measured based on self-reported responses. Factor analysis has
been used to reduce the behavioural variables into corresponding latent variables and

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analysis of variance (ANOVA) is employed to analyze experimental data.

Results from the study reveal that demographic variables play a significant role in
explaining attitude towards saving. However, apart from considering demographic
variables, characteristics of saving goals, availability of information and services,
financial education and individual regulatory orientation are significantly related to

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attitude toward saving. The study reveals the pattern and preferences for saving
instruments among the households.

The findings of the present study indicate that demography affects the choice of

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saving instruments, diversification in investment and overall saving behavior. It was also
found that besides individual demographic characteristics, perception and individual
attitude are important factors in explaining peoples saving pattern. The study also
highlights some critical issues in the household saving of the state, like low level of
financial education among the households, low insurance penetration and readiness for
making investment in sophisticated financial instruments. These findings have
implications for making public policy to promote various kinds of saving & investment
and for household investor education. Targeting households by considering above
findings would increase the effectiveness of public messages regarding particular saving
instruments.

vi

Title of the Study

Declaration
Certificate
Acknowledgements
Preface
Abbreviations
List of Tables
List of Charts
List of Boxes
List of Annexures

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CONTENTS
Page No.
i
ii
iii
iv
v
xi
xii
xvii
xviii
xx

1-3
Chapter II: Review of Literature & Objectives of the Study
4-30
2.0
Review of Literature
4
2.1
Studies Conducted by World Bank, OECD and other International 5

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Chapter I: Introduction

Studies

Relationship between Saving & Development/Growth

2.1.2

Household Savings Differences across the Regions

2.1.3

Determinants of Saving in International Literature

6
6
10

2.1.4

Motives for Saving by Households

12

2.2

Estimates of Saving in India (Macro Level Studies)

14

2.2.1

A Statement of Household Savings in India

16

2.2.2

Salient Features of Household Savings and Investment Trends in 22

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2.1.1

India

2.2.3

Determinants of Saving in India

24

2.3

Micro Level Studies on Household Saving in India

26

2.4

Research Gap

29

2.5

Scope and Objectives of the Study

30

Chapter III: The State of Uttarakhand: Profile

31- 44

3.0

Introduction

31

3.1

Geographical Location

31

vii

Demographic Features

34

3.3

The Economy

35

3.4

Agriculture

36

3.5

Industries

37

3.6

Infrastructure

38

3.7

Tourism

40

3.8

Information Technology

41

3.9

Social Characteristics

41

3.10

Income & Poverty

3.11

Financial Infrastructure and Development

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3.2

42
44

Chapter IV: Household Savings & Investment Behaviors Concept, 47-61

Definition & Methodology

Concepts and Definitions

47

4.1.1

Households

47

4.1.2

Income

48

4.1.3

Saving

48

4.1.4

Investment

50

4.1.5

Individual/ Household Investment Behaviour

50

4.1.6

Financial Literacy

52

4.1.7

Dependency ratio

53

4.2

Methodology:

55

4.2.1.

Questionnaire

56

4.2.2

Population

56

4.2.3

Sampling unit

56

4.2.4

Sample size

56

4.2.5

Data Source and Sampling Procedure

57

4.2.6

Sample Profile

57

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4.1

Chapter V: Household Savings & Investment and the Economic

62-98

Development of Uttarakhand
5.1

Household Income Status in Uttarakhand

63

5.2

Composition of Financial Savings of Households

68

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5.3

Financial Savings in Uttarakhand State

70

5.3.1

Currency

71

5.3.2

Deposits

72
72

5.3.2.2 Region & District-wise Banking in Uttarakhand

77

5.3.2.3 Co-operative Banks

80

5.3.3

Insurance

83

5.3.4

Post Offices and Mobilization of Household Savings in 86

Uttarakhand

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5.3.2.1 Banking in Uttarakhand

5.3.5

Government Provident Fund and Pension Fund

88

5.4

Liabilities of Household Sector- Bank Credit to Households in

90

Uttarakhand

93

Microfinance: Saving Opportunity for poor in Uttarakhand

5.6

Capital Markets, Small Investors in the State and Internet Banking 97

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5.5

and Investment

99- 133

6.1

Area of Living and Diversification in Investment

99

6.2

Caste and Diversity in Investment in the Rural Area

102

6.3

Caste and Diversity in Investment in the Urban Area

102

6.4

Occupation and Diversity in Investment

106

6.5

Family Income and Diversity in Investment

106

6.6

Dependency Ratio in the Family and Diversity in Investment

109

6.7

Sources of information used by households

111

6.8

Credit Financing among Households

112

6.9

Insurance

113

6.10

Awareness of Micro Finance

116

6.11

Motives of Saving

116

6.12

Methods of saving

117

6.13

Attitude, Perception and Readiness of Investors towards Different

117

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Chapter VI: Analysis of Household Savings and Investor Behaviour

Investment Instruments and Avenues

6.14

Perception towards Banking Facilities

ix

121

6.15

Confidence in Managing Personal Finances

121

6.16

Readiness for Capital Market Instruments

124

6.17

Role of Tax Motives in Investments

128

6.18

Preference for Current Income over Growth

130

6.19

Risk Taking Attitude

130

6.20

Portfolio Choice

132
134-138

7.1

Conclusions

134

7.2

Recommendations and Policy Implications

136

7.3

Limitations of the Study

136

7.4

Significant Contribution and Scope for Further research

137

Bibliography

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Annexures

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Chapter VII: Conclusions & Recommendations

139-151
152- 170

LIST OF ABBREVIATIONS
Central Statistical Organization

GCA

Gross Crop Area

GDP

Gross Domestic Product

GDPCMP

Cross Domestic Product at Current Market Prices

HH

Household

HLC

High Level Committee

HNWI

High Net Worth Individual

HP

Himachal Pradesh

IBEF

India Brand Equity Foundation

IMF

International Monetary Fund

IRDA

Insurance Regulatory and Development Authority

MRP

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LCH

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CSO

Life Cycle Hypothesis

Mixed Recall Period

NABARD

National Bank for Agriculture and Rural Development

NAS

National Accounts Statistics

National Council of Applied Economic Research, India

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NCAER
NNP

Net National Product

NSDP

Net State Domestic Product

NSSO

National Sample Survey Organization

OECD

Organization for Economic Co-operation and Development

PCI

Per-Capita Income

RBI

Reserve Bank of India

SHG

Self Help Group

SPCI

State Per-Capita Income

RRB

Regional Rural Bank

URP

Uniform Recall Period

xi

LIST OF TABLES
S.No. Table

Title of the Table

No.

Page
No.

2.1

Gross Domestic Saving & Investment

17

2.2

Components of Household Financial Savings in India

20

2.3

Trends in Sectoral Saving & Investment

22

3.1

Uttarakhand States Gross Domestic product (SGDP) at Current 35

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Prices (1999-2007)
3.2

Net State Domestic Product at Current Prices

35

3.3

Per Capita Net State Domestic Product at Current Prices

36

3.4

Percentage of Population Below Poverty Line (2004-05)

43

3.5

State and Population Group-Wise Distribution of Offices 45

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Opened by Commercial Banks 2008 and 2009

3.6

Population Group-Wise Distribution of Number of the 46

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10

Reporting Offices, Aggregate Deposits And Gross Bank Credit

in Uttarakhand All Scheduled Commercial Banks September 2009

11

5.1

Structure of Adjusted Net Household Income by Occupation

64

Category (Rural Sector), 200405

12

5.2

Structure of adjusted Net Household Income by Occupation

64

Category (Urban Sector), 2004-05

13

5.3

Per Capita Net State Domestic product at factor cost State-

65

wise(At Current Prices) in Rupees Base: 1999-2000

14

5.4

Percentage of Households in the bottom and Top Income

Category 2008

xii

66

15

5.5

Annual Per capita Consumption Expenditure Across States (Rs.

67

000 per person) 2008

16

5.6

State-wise Estimated Number of Below Poverty Line (BPL)

67

Households (As on 01.10.2006)

17

5.7

Changes in Financial Assets / Liabilities of the Household

69

Sector
5.8

Changes in Financial Liabilities of the Household Sector

19

5.9

Household savings in the form of Currency

71

20

5.10

State And Bank Group-Wise Branches Of Scheduled

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70

Commercial Banks March 2008

21

5.11

Distribution of Number of Accounts of Scheduled Commercial

75

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Banks According to Type of Deposits in Uttarakhand, March

2001vs 2008

22

5.12

Distribution of Number of Accounts of Scheduled Commercial

76

Banks According to Type of Deposits in Uttarakhand March

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2001vs 2008

23

5.13

Per Capita Bank Branches (2007-08)

76

24

5.14

Ownership Pattern of Deposits of Scheduled Commercial Banks

77

25

5.15A District/Bank Group-wise Distribution of Number of Reporting

78

Offices, Aggregate Deposits and Gross Bank Credit (Quarterly)

of All Scheduled Commercial Banks in Uttarakhand Part I (Sep
2008)

26

5.15B District/Bank Group-wise Distribution of Number of Reporting

79

Offices, Aggregate Deposits and Gross Bank Credit (Quarterly)

of All Scheduled Commercial Banks in Uttarakhand - Part II
(Sep 2008)
27

5.16

Uttarakhand - Area wise Bank Branches

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79

28

5.17

Uttarakhand - Area wise Bank Deposits Accounts

80

29

5.18

Uttarakhand - Area wise Bank Deposits (In Rupees)

80

30

5.19

Aggregate Deposits and Gross Bank Credit Of State and District

81

Central Co-Operative Banks in Uttarakhand March 2007

31

5.20

State-Wise Number of Branches of State & District Central Co-

82

Operative Banks 31 March 2001, 2007 & 2008

5.21

State-Wise Deposits & Loans of District Central Co-Operative

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32

82

Banks 31 March 2001-2008

33

5.22

State-Wise Deposits & Loans of State Co-operative Banks

83

(2004-2008)
5.23

Level of Non-indebtedness: Across States

83

35

5.24

State-wise Distribution of Insurance Offices (As on 31 Mar

84

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34

2007vs 2009)

36

5.25

State-wise Spread of Individual Agents (As on 31 Mar 2007 vs

84

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2009)

37

5.26

Individual New Business Underwritten State-wise

85

Number of Policies 2006-2007 vs 2008-09

38

5.27

Individual New Business Underwritten State-wise Premium

86

Amount 2006-07 vs 2008-09

39

5.28

Share of Banking and Insurance Industry in Net Domestic

86

Product at Factor Cost in Uttarakhand (Base: 1999-2000)

40

5.29

Per Capita Post Offices

87

41

5.30

Small Saving Collection from Feb 2004 to Jan 2009 in

88

Uttarakhand
42

5.31

Per Capita Small Saving Collection (2004-05) vs (2008-09)

88

43

5.32

Household Savings in Provident Fund, Insurance and Pension

90

xiv

Fund in Uttarakhand
44

5.33

Commercial Bank Credit per Person

91

45

5.34

State and Population Group-wise Gross Bank credit of All

91

Scheduled Commercial banks- March 2008

46

5.35

Development of Cumulative nos. of SHGs financed by

93

NABARD
5.36

Level of Non-indebtedness: Across States

94

48

5.37

SHG Credit Linkage by RRBs : March 2006

95

49

5.38

Shares and Debentures as a percentage of Gross Financial

97

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47

Savings of the Households

6.1

Selection of Investment Avenues among Respondents

51

6.2

Financial Income Level of SC/ST/OBC Category

103

52

6.3

Education Level of SC/ST/OBC Category

103

53

6.4

Purpose of Raising Loan from Banks among Respondents

112

54

6.5

Insurance Policies-Family Member Ratio

113

55

6.6

Insurance Policy per Household

114

56

6.7

Motives for taking Insurance Policy

115

57

6.8

Child Insurance Plan and other plans taken by Household

115

58

6.9

Household Awareness about Micro Financing

116

59

6.10

Rural Household Awareness about Micro Financing

116

60

6.11

Motives of Saving

117

61

6.12

Method of Saving

117

62

6.13

Rotated Component Matrix (Factor Analysis)

119

63

6.14

Perception towards Investment in Shares & Mutual Funds

125

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50

xv

101

6.15

Aggregate Portfolio Allocation Choice

132

6.16

Selection of Number of Saving Instruments/ Investment

132

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Avenues under Portfolio Choice

xvi

LIST OF CHARTS
SN

Chart No. Title of the Chart

Page
No.

2.1

Growth and Domestic Saving

18

2.2

Components of Household Financial Saving

21

5.1

Growth in Per Capita NSDP

65

5.2

Percentage of Households in Bottom in Top Income

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66

Category
5

5.3

Share of Branches of Scheduled Banks in India

75

5.4

Outstanding Credit Amount of Schedule Commercial Banks

92

5.5

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in Uttarakhand

Outstanding Credit Accounts in Schedule Commercial Banks 93

in Uttarakhand

6.1

6.2

Number of Information Sources used by the Investors

111

Sources of Personal Financial Information (No. of Users

112

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among Respondents)

6.3

Cumulative Percentage of Insurance Ratio in the Families

114

6.4

Perception of Individual Investor towards Investing in Shares 124

and Mutual Funs

10

6.5

Selection of Number of Saving Instruments/ Investment

133

Avenues under Portfolio Choice among Rural Investors

11

6.6

Selection of Number of Saving Instruments/ Investment

Avenues under Portfolio Choice Urban Investors

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133

LIST OF BOXES
SN Box

Title

Page

No.

No.

2.1

Life Cycle Hypothesis

2.2

Major Determinants of Household Savings in International Economic 11

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Literature
3.1

Geographical indicators of Uttarakhand, 2008

32

3.2

Map of Uttarakhand

33

3.3

List of Districts in Uttarakhand

33

3.4

Demographic Indicators of Uttarakhand

34

3.5

Communication Infrastructure in Uttarakhand (2006-2007)

14

5.1

te

39

16

6.1

Classification of Saving Heads

99

17

6.2

Area and Diversification in Investment

100

18

6.3

Caste and Diversity in Investment in the Rural Area

104

19

6.4

Caste and Diversity in Investment in the Urban Area

105

20

6.5

Occupation and Diversity in Investment

107

21

6.6

Family Income and Diversity in Investment

108

22

6.7

Dependency Ratio in the Family and Diversity in Investment

110

23

6.8

Perception towards Banking Facilities and Caution before making 122

Paradigms of Postal Savings in Uttarakhand: Tie Ups with Private 89

Insurance Companies

5.2

Financial Inclusion in Uttarakhand

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15

95

Investment
24

6.9

Confidence in Managing Personal Finances

xviii

123

25

6.10

Readiness for Capital Market Instrument (Rural vs Urban)

26

6.11

Perception

and

Readiness

towards

Capital

Market

126
Instrument 127

(Education wise)
27

6.12

Tax motives in Investment and information to plan personal 128

finances(Rural vs Urban)

28

6.13

Tax motives in Investment and self knowledge to plan personal finances 129

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(Education wise)
29

6.14

Risk averseness and Preference for Current Income over Growth

29

6.15

Risk taking Attitude: Preference for growth and for financial securities 131

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over traditional investments (Rural vs Urban)

xix

130

LIST OF ANNEXURES
S.No.

Annex.

Title

Page No.

No.
1

Questionnaire English

152

Questionnaire Hindi

156

Factor Analysis of Behavioral Variables

160

Uttarakhand

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Distribution

of

Deposits

of

Scheduled 163

Commercial Banks According to Type of Deposits March

2001
5

State and Population Group-Wise Deposits of Scheduled 164

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Commercial Banks According to Type of Deposits (March

2008)

State

and

Bank

Group-Wise

Deposits

of

Scheduled 165

Commercial Banks According to Type of Deposits- (March

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2008)

Bank Group-wise Classification of Outstanding Credit Amount 167

of Schedule Commercial Banks, March 2001 vs 2008

Small Saving Collections in Post Offices

Components Of Net State Domestic Product At Factor Cost By 169

Industry Of Origin (At Current Prices)

xx

168